Identity Economics….. and Inequality

Introduction – Identity and …. Inequality
Inequality – some people have more, some people have less.
Why do we care?
As social scientists, we want to describe such patterns.
But why do we concentrate on inequality as a pattern of interest?
Maybe bad for growth, development overall.
Maybe its unfair, unjust.
Particularly unjust: inequality associated with social difference
Systematic – certain social groups have more and others have less.
Inequality is not randomly distributed.
US – blacks, Hispanics,
Europe – North Africans, Africans, Roma
Many parts of the world – women

Introduction – Social Categories
Identity –
At a minimum a designator of a social group.
How does identity figure into inequality??
Mere descriptors?
Part of processes and structures that create and sustain inequality?

Introduction – Preferences & “Identity”
What is “identity?”
A person’s sense of self; a person’s self-image.
How a person views him/herself and/or others view him/her.
Note “identity” is used as a descriptor: “I am Hispanic.”
And “identity” is used as way of feelings/emotions
“I have a strong sense of identity; I feel good about myself.”
Judgment depends on ideals, norms a person holds for onself and others hold for that person – depends on social norms for who you are
“I am proud to be Hispanic”
This judgment depends on how “Hispanic” one feels, and whether you and other Hispanics are living up to norms and ideals.

Introduction - “Identity”
Identity-contingent utility/payoff function.
Individuals have preferences over own and others’ actions, depending on identity and norms
Social categories & norms for categories
Individuals care about own actions, depending on identity.
Utility enhanced when abide by norms for own category.
Individual care about others’ actions - externalities
Externality: Others suffer a utility loss (offended?) when norms are violated.
Externality: Others retaliate against those who break the norms – incur a cost but restore utility loss from offense.

Introduction - “Identity”
Why do we want a model with identity?
Add identity to economic framework:
Individuals make choices, interact strategically when utility depends on identities and norms for categories
? patterns of behavior
Identity model can explain patterns that cannot be explained (or uncomfortably explained) with standard model
Add a new understanding to phenomena and policy

Outline of Lecture
Identity & Inequality – Part 1 – Theory
Overview theoretical approaches to social norms/social differences
* Standard Models: Preferences & Constraints
* Strategic Interaction
* “Identity Economics” as a new approach
* Human capital acquisition (schooling) as an example
* Identity and Redistribution as an example
Identity & Inequality – Part 2 – Experiments
Experimental evidence for impact of identity on behavior
Experiments with identity variation
Do people have preferences for “inequality”? YES

Identity and Inequality
Part 1
Economic Theory
Rachel E. Kranton
HCEO Summer School
2021

Introduction – Why theory?
Putting identity/social category markers is standard practice in empirical study of socioeconomic outcomes.
(Dummy) variables: black, female, ethnicity, region, state
Interaction effects: black, female, etc.
To fix ideas – consider education
child or adolescent “underachieves” in school; does not get the education that would be predicted by benefits and costs
Black children in the United States
Roma children in Hungary
Girls in a developing country
What can account for the dummy variables, the interaction effects?
Unpack the black box of these effects.

General Overview of Theoretical Approaches
Basic Economic Model
Individuals have utility from own choices/actions
Idiosyncratic preferences, which are exogenous
Technology (constraints)
? choices lead to patterns of behavior
Strategic Interaction
Individuals have payoffs from own and others’ actions
Idiosyncratic costs/benefits, which are exogenous
Game form (institutions), specifying information asymmetries etc.
? equilibria give patterns of behavior
Preferences determine utilities and payoffs
Preferences – what a person “likes” or “doesn’t like” (Becker)
Preferences – what a person “should” or “shouldn’t do” (A&K)
Combine with technology & constraints, strategic interaction
? choices & equilibria give patterns of behavior

General Overview: Basic Economic Model
Utility Function: individual w/exogenous, idiosyncratic preferences
Makes choice given technology and constraints.
Child likes or not school (or is more or less talented at schoolwork)
Weighs costs and benefits of schooling, given school quality and opportunity cost of attending school, job networks, discrimination.
Pattern: Blacks have lower levels of academic achievement because they attend worse schools, have worse job networks.
Pattern: Girls have lower levels of academic achievement because they have high opportunity cost of time (household).
Useful, because there could be such technology, constraints.
Begs the question why blacks attend worse schools, why women “should” attend to household chores, why there is discrimination.
Pushes the inequality question up one level, to what is behind the assumptions in our models.

General Overview: Strategic Interaction
Strategic Interaction:
Individual payoffs depend on own preferences and others’ actions.
Makes choices strategically, taking into account how others’react.
Equilibria ? social pattern
Repeated game, punish those who violate the equilibrium action
Equilibrium can be a “bad social norm”
Signaling game, actions indicate underlying unobserved attribute
Equilibrium is a social norm – but notice signaling costs
Add labels – and then have a theory of an outcome
Girls invest less in school to not have bad marriage prospects.
Black children achieve less in school to signal more “sociable” type (Austen-Smith & Fryer 2009)
Blacks are not hired by firms to avoid boycott by consumers.

General Overview: Strategic Interaction
Inequality is the capricious outcome of strategic interaction –
Has no social context per
There is nothing particularly meaningful about being black, female, North African, etc.
This view is useful. Social norms may indeed be “bad equilibria.” Intervention needed to change the equilibrium.
United States civil rights law.
But consider three basic points:
Theoretical requirements to sustain equilibria are very strong
There is much social context associated with norms – discussions in literature, press, law, activists, etc.
People die over these issues

General Overview – Preferences and “Identity”
Preferences and norms are a possible source of inequalities.
Becker: a taste-based theory of discrimination
In the same way some people like apples and others like oranges, some people may not want to work with Black co-workers or women.
Workers with these tastes would require a wage premium.
Blacks/women then have lower benefits of education
But competition could eliminate such high-cost firms.
Point: maybe preferences per se matter.
Akerlof & Kranton: preferences both “likes;” and “shoulds”
Preferences are not all idiosyncratic, rather socially derived
Depend on peoples’ social identities
Identity-based preferences are contested

Akerlof & Kranton – Identity & Preferences (Norms)
Build a model where individuals think of themselves and other (more or less consciously) in terms of social categories.
People have tastes, but also norms for how people should behave.
People have utility from own actions, and others’ actions
people internalize norms
punish others who violate “social code”
Use this utility function to study schooling and minority poverty.

Identity – General Framework
Start with a standard model of utility.
The utility of person j is represented as
Wj = Wj (aj, a-j)
where aj are j’s actions, a-j are others’ actions.
The inclusion of a-j captures the possibility of externalities or strategic interaction.
For example:
aj is the effort of j in school, and a-j is the effort of others in school, which may hurt or help j’s academic achievement

Identity - General Framework: Utility & Identity
Add identity ingredients
Set of Social Categories: C.
Individual j’s assignment of self and others to categories: cj.
Norms, N, give appropriate behavior, ideal attributes of each social category.
Utility Function
Uj = Uj (aj, a-j, Ij)
aj are j’s actions, a-j are others’ actions, Ij is j’s self-image:
Ij = Ij (aj, a-j ; cj , εj , N)
where εj are j’s given attributes.

Identity - General Framework: Utility & Identity
Uj = Uj (aj, a-j, Ij) Ij = Ij (aj, a-j ; cj , εj , N )
Overall utility depends on how actions aj , a-j affect “economic utility,” and how they affect self-image, Ij.
Self-image (identity, Ij) depends on
Acting as should: match between actions and category norms N
Fitting in: match between εj and ideal of category specified by N
Status: status of assigned category, given by Ij()
In basic case, person j chooses aj to max utility, taking as given category assignment (cj) own attributes (εj) norms (N).
In general, a person could act to change own category, own attributes, and societal norms. Third parties have incentives.

Example of Identity Model – Education & Schooling
Akerlof & Kranton (2002)
Basic model of education = investment in human capital
Large population of individuals
Each individual ni = “ability”
Marketable Skills/Payoffs from effort choice ei and ability:
vi = ni ei – k(ei)
Optimal effort (schooling level) balances benefits and effort costs
Not a good model of children or adolescents
Identity model makes the child/adolescent the decision-maker
Considers their motives and interactions – US high school

Large population of individuals
Each individual exogenously given ni = “ability”
Marketable Skills/Payoffs from ability and effort choice ei :
vi = ni ei – k(ei)
Each individual has a second exogenously given characteristic
li = “looks” ; i.i.d. uniform on [0,1]
Social Categories: C = {Leading Crowd, Nerds, Burnouts}
Norms/Ideals: l=1 for Leading Crowd, n =1 for Nerds
Norms/Ideals: e(N) > e(L) > e(B)
Identity utilities depend on category, effort, and fit with Ideal
Ic – t (1 – εi(c)) – ½ (ei – e (c))2
IL > IN > IB
Example of Identity Model – Education & Schooling
Akerlof & Kranton (2002)

Individual’s overall utility:
Ui (ei , C; εi, Norms) =
ni ei – k(ei) + IC – t (1 – εi(C)) – ½ (ei – e (C))2
Individuals choose effort, ei ,and category, C, to max utility
Tradeoff: skills, status, fitting in, and abiding by norms
E.g., high ni : choose C = Nerd and ei = e(N)
high skills, fit in, abide by effort norms for category, but low status
Example of Identity Model – Education & Schooling
Akerlof & Kranton (2002)

Individuals choose (simultaneously) effort and category.
Balance payoffs from effort in school, “fitting in” to category
High l, also high n, individuals choose to be L rather than N
Low l and low n students choose to be B, rather than L or N.
(don’t want to be a “wannabe”)
Choose effort in school according to norms e(C)
Identity payoffs lead lower academic achievement/schooling
Example of Identity Model – Education & Schooling
Akerlof & Kranton (2002)

School policy to affect achievement through social arrangements
Introduce athletics, and social category Jocks (as part of L)
Students have another characteristic ai = athletic ability
Students make choice of category and effort:
High a but low l and low n students now choose to be L
High a but high n now choose to be L rather than N
Overall increase or decrease academic achievement
But less divergence in academic achievement
fewer B’s and fewer N’s
Example of Identity Model – Education & Schooling
Akerlof & Kranton (2002)

Consider a population with different ethnic, social groups.
Curriculum thought to favor one of the groups (dominant/majority)
Marketable skills depend on effort at mastering this curriculum but curriculum has identity associations, payoffs
Math vs. English class. data
School policy to affect achievement by changing curriculum to affect identity payoffs of effort.
Example of Identity Model – Education & Schooling
Akerlof & Kranton (2002)

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Example of Identity Model – Redistribution
Shayo (2009)

Add identity considerations – groups and utility
Set of groups, each group J characterized by ideal attribute qJ
Status of group J based on relative income vis a vis J’
Ideal attribute and status depend on social outcome t
Each agent i has individual attribute qi
An agent i identifies with group J if i:
prefers social outcomes in which group J’s status higher
prefers social outcomes in which i’s distance from group J ideal is lower
•
Example of Identity Model – Redistribution
Shayo (2009)

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Example of Identity Model – Redistribution
Shayo (2009)

Social Identity Equilibrium = actions and identities for each agent and outcome t such that
each agent’s identity choice optimal given t
each agent’s action is optimal given identity J
t is determined by agent’s actions via aggregation process
Multiple Social Identity Equilibria =
poor identify with lower class, vote for redistribution (which enhances status of lower class)
poor identify with the nation, do not vote for redistribution, status derives from national group
•
Example of Identity Model – Redistribution
Shayo (2009)

Identity and Inequality
Part 2
Economic Experiments
Rachel E. Kranton
HCEO Summer School
2021

Experiments with Social Groups, Identity
Do people behave differently (towards others) depending on identity/social group?
Experiments where social category/identity is research objective
Own Actions – do people have different behavior when identity is “salient”
Strategic Play – do people play differently depending on identity/social group?
Social Preferences (fairness, inequity aversion)
Do people have preferences for inequality? YES
Challenge is to design experiments with social group variation.
Real-world groups – different ethnicity, club membership
Preserve anonymity to avoid repeated game effect
Create groups in the lab.

Experiments: Own Behavior
“Stereotype Threat”
Steele & Aronson (1995)
Incentives and Stereotype Threat?
“Discrimination, Social Identity and Durable Inequality
Hoff & Pandey (2006)
Children in India, paid to solve mazes – piece rate
Three conditions –
anonymous, caste revealed integrated, caste revealed segregated
Lower caste subjects completed fewer mazes in both caste revealed conditions relative to control

Experiments: Strategic Games
“Discrimination in a Segmented Society” Fershtman & Gneezy (2001)
Objective: test for “taste for discrimination” vs. “stereotypes”
Do people discriminate per se or are they concerned about actions others will stereotypically take?
Israeli Jewish students – European vs. Eastern origin (last name)
Trust game – sent less to Eastern (though return about the same)
Dictator game – sent about the same to both types
Ultimatum game – sent more to Eastern (“concern for respect”?)
Trust result only for males.

Experiments: Social Preferences
Social Preferences = value placed on other’s income
Many experiments where subjects allocate income to self and to others. E.g., i chooses top or bottom row
Show inequity aversion, social welfare max.
People not only self-interested.
Fehr & Schmidt (1999), Bolton & Ockenfels (2000), Andreoni & Miller (2002), Charness & Rabin (2002)

Reality Check on Social Preference Experiments
Group conflict feature of human history
Groups defined on religion, “race,” nationality, culture
NOT inequity averse: Forcibly extract labor, resources from others
Country and regional borders, civil wars, alternative identities

Experiments: Group Conflict, Identity, Social Prefer
Social Psychology Experiments (1950’s – 1970’s)
Robbers Cave (Sharif & Sharif)
Minimal Group Experiments (Tajfel & Turner)
Social Preferences and Groups – Chen & Li (2009)
Minimal Groups
Allocate income to self and others
in-group vs. out-group
Results: less inequality averse to those in other group

Social Preferences Estimation
Ui(πi, πj) = βiπi + ρi(πi − πj)r + σi(πj − πi)s
βi weight on own income
ρi weight on income difference for πi > πj (r = 1; s = 0)
σi weight on income difference for πi ≤ πj (r = 0; s = 1)

But what about ubiquitous group conflict??
Group conflict feature of human history
Groups defined on religion, “race,” nationality, culture
NOT inequity averse: Forcibly extract labor, resources from others
Country and regional borders, civil wars, alternative identities

“Deconstructing bias in social preferences reveals groupy and not-groupy behavior”
Rachel Kranton, Matthew Pease, Seth Sanders, Scott Huettel
PNAS (2021)

“Deconstructing Bias” – Introduction
Maybe stronger identification with group ?
Do people who identify more with a group engage in discriminatory behavior?
Findings: No ..... but
Groupy vs. Non-Groupy Individuals
Some people have no ingroup bias – same towards everyone
Some people have strong ingroup bias - destructive (consistent with average of “inequity averse”)
tendency for ingroup bias could be individual tendency
…..Individual correlates of groupy/not groupy ?
…. Settings/information change behavior towards others?

Two conditions: minimal group, political group – w/i subject
Individuals: more or less identify with assigned group
Replicate ingroup bias on average, but large heterogeneity
Groupy vs. Not Groupy individuals
“Deconstructing Bias” – Introduction

Duke University subject pool - no deception lab
Schematic of experimental session:
Paid for one choice in each – control, MG, POL group
“Deconstructing Bias” – Overview of Experiment

Political Group: participants self-identified as
Democrat Republican Independent None of the Above
closer to Dem closer to Rep
Democrats Republicans
D-Leaning Ind R-Leaning Ind
“Deconstructing Bias” – Overview of Political Treatment

Allocation choices, timed as follows:
26 matrices, 26x7 = 208 decisions per subject
Top, bottom, green, blue, left, right: all randomized
“Deconstructing Bias” – Details of Experimental Task

Choose Bottom = Dominance-Seeking/Inequity Loving

Consider individual “favoritism” in allocating income
For an individual i in condition g, for a given matrix m:
Income given to own – Income given to other
E.g., (100 – 20)
Average across m gives “favoritism” for individual i in g
i’s favoritism in g = MG, and i’s favoritism in g = POL
yes
“Deconstructing Bias” – Basic Results - Favoritism

yes
Favoritism towards Ingroup
Political Group
Favoritism towards Ingroup
Minimal Group
D-Indep
Democrats
Democrats D-Indep
All
All
13.19
(1.89)
5.83
(2.15)
△: 7.36
(3.08)
8.14
(1.85)
1.38
(1.39)
△: 6.76
(2.81)
△ △ : 0.6
(2.6)
“Deconstructing Bias” – Basic Results - Favoritism

Correlation coefficient: 0.63
Regression R2 = 0.40
450 POL= MG
Groupy
Not Groupy:
Correlation 0.63
Linear Regression R2 = 0.4
“Deconstructing Bias” – Basic Results - Favoritism

Ui(πi, πj) = βiπi + ρi(πi − πj)r + σi(πj − πi)s
βi weight on own income
ρi weight on income difference for πi > πj (r = 1; s = 0)
σi weight on income difference for πi ≤ πj (r = 0; s = 1)
“Deconstructing Bias” – Social Preferences (replication)

Individual Estimates – Mixing Model
estimate (βt , ρt , σt ) for given number of “types” t = 1, … n.
estimate for t = 4
(just enough, 5 does not give much more precision)
*data* gives parameters of “types” & % of pop of each type
Given “types,” categorize each individual as a type
each individual has a type in each treatment and for each pairing
Identify groupy vs. non-groupy individuals –
not groupy = same utility type own v.s other
groupy = different utility type own vs. other
“Deconstructing Bias” – Individual Social Preferences

Diagonal = non-groupy – same preferences toward in and outgroup
Off – diagonal = groupy – distinguish between in and outgroup
Dominance seeking vis a vis Other
Cross Tabulations of Subjects’ Types
“Deconstructing Bias” – Groupy/Non-groupy Individuals

Utility Difference
“Deconstructing Bias” – Groupy/Non-groupy Individuals

“Deconstructing Bias” – Groupy/Non-groupy Correlates

Groupiness correlated “real-world” behavior/demog
Political affiliation
In the main study and in follow up M-Turk study
Regional differences (Mturk)
Republicans in Deep South
Decline in jobs from manufacturing (selection?)
“Deconstructing Bias” – Groupy/Non-groupy Correlates

“Social contagion of ethnic hostility” (PNAS, Bauer et. al. 2018)
PNAS, Bauer et. al. 2018
Study of destructive behavior “Joy of Destruction” game
Two counterparts each receive €2.
Simultaneously choose to pay €0.20 to reduce other’s income by €1.
Comparison of behavior towards majority or minority co-ethnic counterpart
Slovak vs. Roma counterpart
Slovak high school student participants
Counterpart was Same (Slovak) or Other (Roma)
(distant school, last name indicator)
Comparison of behavior when others’ choices observed or not
Three participants, decisions made sequentially vis à vis counterparts
One of three decisions was implemented

Results – large influence of peers’ behavior
First movers Destructive or Peaceful uncorrelated with observable charact.
First and second movers greatly influenced later choices
Influence more than double when counterpart was Roma
“Social contagion of ethnic hostility” (PNAS, Bauer et. al. 2018)

Empirical work on identity
What “identity effects” can we observe in data? With emphasis on inequality…..
Two studies – gender, ethnic/religious conflict
Research innovatively exploiting data sets.

“Gender Identity and Relative Income within Households”
Bertrand, Kamenica & Pan (2013)
Gender norms in US = women shouldn’t earn more than men
US administrative data, US Census data
Distribution of share of household income earned by wife exhibits a discontinuity at ½.
When a randomly chosen woman becomes more likely to earn more than a randomly chosen man, marriage rates decline.
Empirical work on the identity

“Persistent Antimarket Culture: A Legacy of the Pale of Settlement after the Holocaust” Grosfeld, Rodnyansky & Zhuravskaya (2013)
Voting patterns, attitudes towards markets relate to pre-WWII Jewish population in area in Russia.
People who lived in separated communities developed animosities toward each other, and opposite values.
Region = either side of Pale of Settlement
Jews deported/killed during WWII – no Jews left
Difference in attitudes on different sides of the border
Empirical work on the identity

Summary & Directions for Future Research
Social groupings are important features of patterns of inequality.
Theories give different implications for policy.
In a model of individual choice, people from different groups face different constraints, technology. Necessarily have worse outcomes.
Policies- remove constraints, improve technology.
In a model of strategic interaction, there can be equilibria where people from different groups have worse outcomes.
Policies – law, collective action to change equilibrium.
In a model where preferences and identity norms are key, people from different groups may have different outcomes due to norms, preferences, social exclusion, social/strategic interactions.
Policies – change social arrangements, social meanings of action, categories and norms . .
Experiments: salience of social groups income alloc, strategic play.
Evidence of “stereotypes,” less trustworthy behavior across groups
Evidence that people have preferences for inequality in group context.